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Global business partnering among family-owned enterprises
Journal of Business Research 62 (2009) 667–672
Contents lists available at ScienceDirect
Journal of Business Research
Global business partnering among family-owned enterprises Salomão Alencar de Farias a,1, Rajan Nataraajan b,⁎, Erica Piros Kovacs a a b
PROPAD, Management Graduate Program, Federal University of Pernambuco, UFPE, Av. Prof Moraes Rego, 1235, CEP: 50670-901, Recife, PE, Brazil Department of Marketing, 201 College of Business, Auburn University, AL 36849-5246, USA
a r t i c l e
i n f o
Article history: Received 1 May 2007 Received in revised form 1 January 2008 Accepted 1 February 2008
a b s t r a c t This article focuses on foreign partnering in the family-owned business sector of a developing economy in Latin America. The article presents a report on four selected Brazilian companies. Following an analysis from a grounded theory perspective, the findings are discussed, and directions for future research are provided. © 2008 Elsevier Inc. All rights reserved.
Keywords: Family-owned business Foreign-partnership Brazilian northeast Export
1. Introduction The best seller, The World is Flat: A Brief History of the Twenty-First Century by New York Times columnist Thomas L. Friedman is one recognition of the prolific global changes in the new millennium (Friedman, 2005). According to Friedman, the explosive growth of telecommunications has shattered all barriers to global competition and “accidentally made Beijing, Bangalore and Bethesda next-door neighbors” in a new leveled economic world. Richard Florida of George Mason University takes issue with Friedman's “flat world” analogy and contends that while globalization has indeed altered the economic playing field, it has not leveled it (Florida, 2005). Instead, he envisions a spiky world; the spikes, representing the unevenness in economic development, are unequal in magnitude. The peaks, hills, and valleys in Florida's “spiky” description seem to more aptly characterize the 21st Century economic world as some regions or countries are developing faster or becoming far more globally active than others. In other words, the role and effects of globalization are not uniform across the world or even within a nation. Brazil, a developing economy, appears to be a case in point. The Northeastern Region (NR) is among the less globally active regions within Brazil. NR provides a low percentage of the Brazilian exports. The relatively small size of the NR market and its greater geographic distance from the Brazilian economic center constrain its development. This region nevertheless evinces great potential to be on the upswing on
⁎ Corresponding author. Tel.: +1 334 844 2450 or 2465; fax: +1 334 844 4032. E-mail addresses: [email protected] (S.A. de Farias), [email protected] (R. Nataraajan), [email protected] (E.P. Kovacs). 1 Tel.: +55 81 2126 8880; fax: +55 81 2126 8870. 0148-2963/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2008.02.003
the global economic dimension mainly because foreign partnerships appear to be on the rise, particularly in the family-owned business sector. This research stems from this educated premise and focuses on NR's potential in this regard. 2. The Brazilian and the NR Global Outlook “Internationalization” can bring about advantages in all facets of a business (e.g., Wild et al., 2006; Yip, 1995; Hitt et al., 2002; Kotabe and Helsen, 2000). Further, the internationalization process is a major dimension in the ongoing strategy process of most business firms (Melin, 1992). Actually, it is now becoming clearer that, with the world becoming smaller and smaller, a lack of a global outlook on the part of an organization may result in their losing even their national markets to competitors from around the world. Despite the recognition of the benefits that the internationalization process can bring about, the Brazilian participation in the global arena hitherto is hesitant if not timid. In 2005, Brazil was ranked 23rd among the exporters of the world even though it had the 10th largest GDP (Gross Domestic Product). Comprising ten states, NR, represents less than 14% of the Brazilian GDP. The Brazilian exportation list consists of 7000 different items commercialized by 20,000 companies of which only 1738 companies are accounted for by NR. The most exported Brazilian products are vehicles, soy, iron & steel, aircrafts, and ores. However, a top-heavy pattern exists as 75% of the Brazilian sales to foreign countries are done by the 250 largest exportation companies; NR reflects this pattern as its large companies account for more than 70 percent of the total NR exportation. This situation not only indicates that a tiny fraction of the companies hold the lion's share of export business but also underscores the need for
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a greater participation in this regard by micro, small, and medium sized companies. As per the Brazilian Development Ministry's latest statistics, the micro companies comprise 19% of the Brazilian exportation companies but account for only 0.20 percent of the total export dollar amount. The small companies comprise 27% of the exportation companies but account for only 1.6% of the total export dollar amount. Finally, while the medium companies comprise 28% of the Brazilian exportation companies, they account for a mere 7 percent of the total export dollar amount. Needless to say, nearly 92 percent of the total export dollars concentrate in the biggest companies that comprise only a fourth of the total number of exportation companies! The state of Pernambuco, located in NR, represents only 3 percent of its GDP and represents less than 1 percent of the country's total export dollar amount. In the national exporters ranking in 2004, the latest data available in Brazil, Pernambuco is in 17th place (out of 27) and, in contradiction to the current Brazilian status, it still maintains a deficit in its commercial balance! Only 219 companies export and the exports are quite concentrated in some products, most of which are without aggregated value, such as sugar (30%), iron and steel (22%), fruits (10%), and crustaceans (7%). This is ironic considering that NR is geographically closer to the viable European and American markets and the smaller distances can bring about a reduction in some cost components that can make a difference in the final price calculus of products abroad. 3. Objectives Scholars research the aspect of networking in the internationalization process but such exploration occurs mostly in contexts pertaining to the “peaks of the spikes” (Florida, 2005). Far less attention focuses on the “short spike” clusters of the world. The lack of experience in exportation is the reality with the majority of small and medium companies not only in NR but also in Brazil as a whole. This ineluctable fact couples with the glaring lacunae in the literature on the internationalization process of companies in developing economies provided the motivation to conduct the research reported in this article. In essence, this research aims to understand the different realities experienced by exporters with no prior experience in international business, and their international partners. This article fulfills three objectives: (1) to assess the role and influence of foreign partnerships in the success/failure of mediumsized companies in the family-owned business sector of NR, (2) to understand how these firms perceive and comprehend success and failure, and (3) to understand and assess the role of foreign partnerships in shaping both the national and international strategies of the domestic (Brazilian) firm. 4. Method Fulfilling of the objectives occurs through a qualitative study in the exploratory mode. Specifically, the method involved “selected case analysis” carried out from a grounded theory perspective. Essentially, a grounded theory perspective aims at building substantive theory after carefully considering the practice. In this sense, it is grounded to the real world. The final result is a theory that results from the data and therefore has relatively more specificity and practical utility. In particular, this approach is appropriate to the study of any behavior that has an element of interaction. For a comparative analysis of grounded theory, ethnography, and phenomenology, the reader is referred to the work of Goulding (2005). Given that the overall objective was to understand the internationalization process carried out by NR firms, this qualitative method in the exploratory mode, at least as an important first step, was appropriate. Four family-owned NR companies that ranged from small to medium size were chosen for in-depth study and the data were collected through semi-structured personal interviews with key
informants (e.g., the main managers of the firm). The case analysis pertaining to each of these four companies with disguised names is presented one by one in the next section. 5. The four cases 5.1. Company A: Alco This company belongs to the alcoholic beverage industry and illustrates that success, perhaps, lies in the eyes of the beholder. Alco markets “cachaça” (a sugarcane-based rum used in the preparation of the well-known Brazilian alcoholic beverage called “caipirinha”) as well as fruit cocktails, cognac, rum, and vodka. In 2003, under the auspices of an export promotion project sponsored by the local government, the company entered the export market through a partnership with a well established firm in Europe. Prior to this venture, Alco had no experience in exportation and had confined its operation only to the domestic market, the rural areas in particular. Actually, even though, it had 16 years of experience in the local market, it had not acquired any knowledge of the international market for its products until it began to participate in the above government project for exportation promotion. The company was included in the project in November 2002, and it was the first “project” company to export, and the only one to do so until the end of the promotion period. In its internationalization process, the company chose to reduce its product- portfolio. It first attempted to introduce passion fruit and lemon cocktails, and pure cachaça. During the project period, the company participated in international fairs in Europe and Asia, as well as in international missions and national fairs. At one of these international fairs in Europe, the manager of the government project met a prominent European importer who had an interest in Alco's products, but nevertheless opined that some aspects of the products and packaging needed to be altered. The following comments from subjects capture the above: When I met the client, he believed in the success of the products (cachaça and cocktails). He thought that due to the prevailing Brazilian image in France the products would be well received. …… However he thought that the label was poor, the bottle was too big for the European standards, and the flavor should be changed…… as well as a reduction in the sugar and alcohol contents. However, he was willing to participate in the process and help in changing the product. (The quoted comments in this article are verbatim translations from Portuguese to English. This was done to retain the local cultural flavor even at the risk of yielding awkward syntax in English.) That subjects recognized the importance of establishing “contacts” (networking) is reflected in the following comments: What helped the exportations the most was the participation in fairs and missions…the contacts that I made there….We didn't make business on the moment, but after we hung in tough. Such contacts initiated networking which quickly began to influence the internationalization process of the company. Since these first meetings, a process involving e-mail exchange, telephone calls, and international trips ensued and lasted for six months. After the needed changes in the products were incorporated, the first exportations to Europe occurred. The Brazilian exporter was very interested in being paid in euros which the importer did with alacrity thereby supporting Alco's cash flow situation. The European partner aided Alco in re-designing all aspects of marketing including packaging, labeling, and product content
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specifications, and the latter was suddenly doing well in the export business! However, this state did not last long as the company managed to ruin its relationship with the European partner owing to non-conformity with the contractual terms. In a nutshell, the company actually began to cut corners to reduce costs without paying any heed to the contract! The interviews revealed that Alco's actions were most likely the result of inefficiency and ineffectiveness and not a wanton desire to cause harm, financial or otherwise, to the European partner. However, it became equally clear that the partner (who was also interviewed) could not comprehend such violations to the contract and viewed them negatively. In the final analysis, while the European Partner deemed the venture a failure, Alco opined otherwise. For this company, strangely enough, the mere fact that it could display the label “export product” on its offerings depicted “success”. 5.2. Company B: Tex This company used to export handmade textiles to Belgium. They did not produce the items themselves. Instead, they relied on suppliers of handmade textiles in the rural regions of the state. The company did not have any prior experience in exporting and by its own admission, held a simplistic view of the exportation business. Apparently, in their naïveté', they trusted the first international businessman (of Belgian nationality) who came along to offer something in this regard! And Tex came into existence as an exporting company. The first exports happened without a hitch and the export volume started to increase fairly rapidly. This partnership, at the beginning, seemed to be a “win–win” one, but soon the importer started pressuring Tex to reduce their prices citing market price-related reasons for his request. The importer refrained from furnishing market-related details to Tex and was pretty much controlling the show. Tex later found out that this pressure had nothing to do with market prices but had everything to do with importer greed! In other words, while Tex reduced its prices, the importer continued to rake in his margins. Needless to say, this revelation of the selfishness of the importer caused them to harbor much resentment. In any case, realization dawned on Tex that the initial “win–win” partnership had relegated to a “win–loss” one, with Tex taking all the loss. The following comments capture the above. At the beginning we were quite naive. We believed that the importer wanted to help us. Sooner, something different came out. He was pressuring us to decrease the prices but these were stable in Belgium. He wanted to have higher profit margins and we were practically working for him, not with him. In the wake of this dismal experience, and after an unsuccessful quest for alternative partners, Tex chose to open its own sales subsidiary abroad, but soon decided to close it down because it simply lacked the experience to deal with international competition especially from China, as captured in the following comments:
We realized that the business would not go on with that foreign partner…… This way, we decided to open a sales subsidiary to directly deal with our clients”…… Unfortunately, our lack of adequate European market knowledge, and the competition, especially from Chinese, made us give it up and close our European base. Obviously Tex had neither the international experience nor even sufficient information to open and run its own subsidiary successfully. In the final analysis, Tex considered this foreign partnership a complete failure not because of inept management but simply owing to overwhelming competitive forces.
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5.3. Company C: Flower World Company C is in the tropical flowers business. Initially, it was operating only in the domestic arena. Soon, sensing the export potential of the product, it entered the European market through direct selling to flower importers in that market. In the beginning, the company was buying products from local (in-state) producers and exporting the same to Europe. In other words, Flower World was relying totally on the effectiveness and efficiency of local producers for the supply of flowers. However, such reliance turned out to be highly risky because the local producers were experiencing fiscal problems and were unwilling to adopt better production methods. Even though other out-of-state suppliers were available, given the perishable nature of the product and the logistical difficulties, Flower World took the bold step to produce its own flowers through a local cooperative, which led to satisfactory stabilization in its export business. Overall, Flower World characterizes itself as successful and attributes its success to its own bold initiatives in reducing uncertainties in supply. Currently, Flower World is a major producer in the state and the international venture helps the cash flow of the company. The following comments capture the audacious savvy in the entrepreneurial behavior of these businessmen when searching for international opportunities: I would get to Italy and open the local yellow pages to search for flower distributors. I do not speak English but I would do fine. I would schedule the meetings, and ended up getting our local distributors this way. Today, the company has a partnership that can only be considered a success. The foreign partner is involved in the whole process, from the packaging to the exportation logistics, and also helps with flower bouquet contests and flower fairs. This partnership has brought a great deal of expertise to this NR firm that is resulting in significant improvement in their business process including global professionalism. Flower World is currently negotiating with a big international retailer, which, if it fructifies, will lead to doubling their production. 5.4. Company D: Conglam Company D has quite a diversified product portfolio including flowers and fruits production, pet food and medicines distribution, and seeds technology. In the beginning of 2006, when it realized the export boom in the “cachaça” business, Conglam started to develop its own brand based on a secret recipe that had been in the owner's family for many years. As a matter of fact, the “cachaça” export volume doubled from 2001 to 2005 in Brazil, and companies are now seeking this international opportunity, capitalizing on the perceived trendiness of Brazilian beverages in Europe. Before production started, Conglam established several relationships resulting in internal and external partnerships. The entrepreneurs, due to a bad experience in the past, decided to invest effort in partnerships beforehand, since they consider that it is a real partnership that leads to success. The national partnerships involved local consultants, specialists and suppliers, while the international ones included European importers of “cachaça” who had a reputation for active participation in the various facets of the operation (brand name determination, pricing, packaging, and aspects of the product itself) of their international suppliers. In short, they wanted to implement on the platform of a “building together” strategy. Some of the above is captured in the following comments: We decided to begin the process with the best in each area…… We hired the best consultants in the international business, cachaça production, etc…
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It was a risky business for everyone, which we believe will work out fine. If we succeed, all will win and it is clear that everyone is committed for that to happen… We developed the product for the international market… We used a local advertising agency, and it did not work… The international market is different, clients are different….The best solution was to involve possible international clients in the development of packaging, product characteristics, etc, through partnerships. It was the best thing we have done. The first exports occurred in December 2006 without mishap before and after. They also began to participate in international (e.g., IFE, Alimentaria) and national fairs as well as in events sponsored by SEBRAE (the Brazilian agency for small and medium companies) mainly to bring greater awareness to their brand both in EU and Brazil. So far, other than for some periodic price adjustment problems, it has been a fairly smooth sailing for them in the international economic ocean. Therefore, Conglam is a “success”. 6. Discussion and conclusions In the four cases presented in this article, t network establishment is an important trigger factor for the first exportation. Networks can also facilitate smooth operation in export markets (Ghauri et al., 2003). These cases also show that partner selection is critical to success and in line with alliance theory, each of these companies from the emergent Brazilian market (in contrast to the ones in a developed market) was searching for a partner who could offer it both financial support and target market knowledge (Hitt et al., 2000). The four companies are clearly in the “Floridian short spike” cluster (Florida, 2005) and relatively far less experienced and knowledgeable regarding world markets, product preferences, legislation, and consumer issues. Nevertheless, these companies found in partnerships a way to enter and compete in the global arena, although, with the possible exception of Conglam, the decision-making during the whole process of internationalization was very passive; the initial stimulation came from external entities, such as the government or international buyers. Unfortunately, despite the initial promise, the continuation of the internationalization process was not observed in all the cases. Alco and Tex no longer export, and can therefore only be deemed unsuccessful companies at least insofar as their international debut are concerned. This may be traced to a disharmony between the export company's objectives and its partner's objectives; actually, one tried to take advantage of the other, causing a fatal rupture in the budding relationship. The lesson here is that, for a “win–win” situation to result, the internationalization process must continue on the foundation of real and earnest commitment from both dyadic elements. Balance theory (Heider, 1946, 1958) helps depict the Alco situation as shown in Fig. 1a, b, and c. The first figure depicts the situation at the start where seemingly the net product of the triad (3 sides) is “positive” ([+] × [+] × [+] = +) resulting in a balanced configuration. Fig. 1b shows the decline in the situation with the path from Alco (the exporter) to “Real and Earnest Commitment” degenerating to a negative, thereby rendering the net product “negative”, and thus resulting in an unbalanced configuration. Fig. 1c shows how balance is regained. The Exporter–Importer relationship becomes negative making the net product positive once again; apparently, it is easier to blame the other dyadic entity than admit to not being seriously committed to a real and earnest partnership, and thus attain cognitive consistency. In the case of Tex also, the above disharmony between the dyadic objectives was revealed. While the Brazilian exporter had the good will and commitment to the partnership, the importer had greater
Fig. 1. Alco: A Heider balance theory perspective.
interest in taking advantage of the Brazilian company, which eventually ended the relationship. But the disappointment with its international partner actually spurred the company to jump to a more advanced level of internationalization, that is, having an international sales subsidiary. This is a surprisingly new find in this research in that disenchantment in an existing relationship can sometimes trigger the desire to take the high road and move on to try one's luck at an advanced level of the game. Fig. 2a, b, and c depict the situation with Tex from a Heider balancetheory vantage point and are self-explanatory. Note that, in contrast to the Alco situation, it is the foreign partner who is the villain! Flower World and Conglam are successful cases, where a “win–win” partnership sustained the internationalization process and enabled the derivation of mutual benefits for the network. Evolution toward solidarity and cohesion as well as serious commitment from both parties maintained the internationalization process. The foreign partnership in either case was therefore legitimately considered a “success”. The Heider balance-theory perspective remains constant in both cases. These four cases also bring out the relativity in the perception of success or failure. For instance, there may be overall success but such success may be viewed as entirely due to the foreign company or seen as solely for the foreign company. Even though it does not export anymore, Alco considers itself as a successful company solely for having put its products on the European market despite the fact that it perceived the
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Fig. 3 depicts the essence of the foregoing discussion. If it is only the foreign partner who is completely serious about the partnership, then that may likely result in the perception of “success” by only the exporter; the foreign partner will most likely sense only a “failure”. On the other hand, if it is only the exporter who is serious about the partnership, then the opposite may be the likely occurrence. It is only when both parties are serious about their partnership will there be a mutual perception of success. In other words, anything short of a twoway street in an international partnership can only spell doom. 7. Directions for future research
Fig. 2. Tex: A Heider balance theory perspective.
importer as participative and encouraging in the beginning but quite problematic after that. The foreign partner, on the other hand, considers that the venture was a complete failure, and does not expect to do business with the exporter “partner”.
The relevant literature reveals that even though global business is important to all countries, the theories that try to explain the internationalization process have been mostly developed in countries that are in the “peaks of the spikes”. The life cycle model (Vernon,1966, 1979), the eclectic paradigm (Dunning, 1980, 1988), the internationalization theory (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne,1977, 1990), and more recently, the Resource Based Model (Fahy, 1998a,b; Dhanaraj and Beamish, 2003; Sharma and Erramilli, 2004) have all been conceived and elaborated in developed countries. As another example, the adaptive choice model (Lam and White, 1999) declares that managers, when internationalizing, have to solve four specific dilemmas: relative to adaptation of products (standardize or not) and timing of entry (to be a first mover or late mover), organizational configuration, compensation, and the interactions among these. However, just the first dilemma seems to be relevant to the decisions taken in companies that only export. After all, exportation is the first stage of a company's internationalization process. What really happens to the companies that are mostly at the “bottom of the spikes” and that find themselves in more preliminary stages of internationalization? How does the decision-making process to internationalize happen in developing countries such as Brazil, and particularly in small and medium size companies? Such questions have received relatively scant attention in the literature. Fig. 3 depicts the process of perception of success or failure in an international partnership and some key elements necessary for a meaningful evaluation of a partnership in that scenario. This research indicates that what basically counts is the subjectivity in how the outcome is perceived by each side. There must be some kind of commitment, solidarity, and cohesion between the parts for mutual perceived success. This takes time, and in a culturally diverse world, there is more often than not, a lack of a common view on these elements among nations. In any case, for the sake of external validity, it becomes imperative to test the relationships based on the elements proposed in Fig. 3 in a variety of other situations. Only such research
Fig. 3. The relativity in the perception of success or failure.
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will help in better understanding how success or failure is perceived and interpreted by the entities in the global market. The spiky nature of the economic world underscores the need to develop models that would be readily applicable to countries or regions that may not be considered “developed” or “advanced”. This is why, at least as a first step, it might be very useful to study selected cases in these countries or regions, and the findings then can lead to models that will be applicable to developing economies or LDCs aspiring to enter the global competitive arena. The traditional theories of internationalization have also been criticized for not emphasizing the role of networks in the internationalization process (Rutashobya and Jaensson, 2004). By and large, the existing literature only examines networks from the perspective of one of the parties involved (Ford, 2002). As was seen in the cases in this article, networking can contribute to success. Further, it may be noted that the grounded theory approach has the potential to reveal the network details on both sides. In any case, future research would do well to address “networks” in a comprehensive fashion. Finally, while the current global competitive environment demands specific pro-active applications of exportation strategies to achieve success in foreign markets (Aulakh et al., 2000), the decisions to enter the international markets through exportation could be reactive or proactive (Piercy, 1981) according to the responses to the internal and external pressures (Kuada and Sorensen, 2000). In the four case studies presented in this article, although the reactive element loomed large, there were proactive instances. Studying this aspect in more depth in the context of developing economies would be worthwhile. References Aulakh Preet S, Kotabe Masaaki, Teegen Hildy. Export strategies and performance of firms from resource-based emerging economies: evidence from Brazil, Chile and Mexico. Acad Manage J 2000;43(3):342–61. Dhanaraj Charles, Beamish Paul W. An approach to the study of export performance. J Small Bus Manage 2003;41(3):242–61. Dunning JH. Towards an eclectic theory of international production: some empirical tests. J Int Bus Stud 1980;11:19–31. Dunning JH. The ecletic paradigm of international production: a restatment and some possible extensions. J Int Bus Stud 1988;19(1):1–31. Fahy John. Resources and global competitive advantage: a study of the automotive components industry in Ireland. Ir Mark Rev 1998a;10(2):3–15.
Fahy John. The role of resources in global competition. In: Hooley Graham, Loveridge Ray, Wilson David, editors. Internationalization: Process, Context and Markets. New York: MacMillan Press; 1998b. p. 122–35. Florida Richard. The world is spiky. Atl Mon 2005:50–1 [October]. Ford David. Distribution, internationalization and networks: solving old problems, learning new things and forgetting most of them. Int Mark Rev 2002;19:225–35. Friedman Thomas L. The World is flat: A brief history of the twenty first century. NY: Farrar, Straus, and Giroux; 2005. Ghauri Pervez, Lutz Clemens, Tesfom Goiton. Using networks to solve export-marketing problems of small- and medium-sized firms from developing countries. Eur J Mark 2003;37(5/6):728–52. Goulding Christina. Grounded theory, ethnography and phenomenology: a comparative analysis of three qualitative strategies for marketing research. Eur J Mark 2005;39(3/4):294–308. Heider Fritz. Attitudes and cognitive organizations. J Psychol 1946;21:107–12. Heider Fritz. The psychology of interpersonal relations. New York: John Wiley; 1958. Hitt Michael A, Dacin M Tina, Levitas Edward, Edhec Jean-Luc A, Borza Anca. Partner Selection in emergent and developed market contexts: resource-based and organizational learning perspectives. Acad Manage J 2000;43(3):449–67. Hitt Michael A, Ireland R Duane, Hoskisson Robert E. Administração Estratégica. 1. ed. São Paulo: Thomsom; 2002. Johanson J, Wiedersheim-Paul Paul F. The internationalization of the firm — Four Swedish cases. J Manag Stud 1975;12(3):305–22. Johanson J, Vahlne Jan-Erik. The internationalization process of the firm — a model of knowledge development and increasing foreign markets commitments. J Int Bus Stud 1977;8:23–32. Johanson J, Vahlne Jan-Erik. The mechanism of the internationalization. Int Mark Rev 1990:11–24. Kotabe Masaaki, Helsen Kristiaan. Administração de Marketing Global. São Paulo: Editora Altas; 2000. Kuada John, Sorensen Olav J. Internationalization of Companies from Developing Countries. International Business Press; 2000. Lam Long W, White Louis P. An adaptive choice model of the internationalization process. Int J Organ Anal 1999;7(2):105–34. Melin Leif. Internationalization as a strategy process. Strateg Manage J 1992;13:99–118. Piercy Nigel. Company internationalization: active and reactive exporting. Eur J Mark 1981;15(3):26–40. Rutashobya Lettice, Jaensson Jan-Erik. Small firms' internationalization for development in Tanzania. Int J Soc Econ 2004;31:159–72. Sharma Varinder M, Erramilli M Krishna. Resource-based explanation of entry mode choice. J Mark Theory Pract 2004;12(1):1–18. Vernon Raymond. International investment and international trade in the product cycle. Q J Econ 1966:190–207. Vernon Raymond. The product cycle hypothesis in a new international environment. Oxf Bull Econ Stat 1979;41(4):255–67. Wild John J, Wild Kenneth L, Han Jerry CY. International Business. New Jersey: PrenticeHall; 2006. Yip George S. Total Global Strategy: managing for worldwide competitive advantage. New Jersey: Prentice Hall; 1995.
Contents lists available at ScienceDirect
Journal of Business Research
Global business partnering among family-owned enterprises Salomão Alencar de Farias a,1, Rajan Nataraajan b,⁎, Erica Piros Kovacs a a b
PROPAD, Management Graduate Program, Federal University of Pernambuco, UFPE, Av. Prof Moraes Rego, 1235, CEP: 50670-901, Recife, PE, Brazil Department of Marketing, 201 College of Business, Auburn University, AL 36849-5246, USA
a r t i c l e
i n f o
Article history: Received 1 May 2007 Received in revised form 1 January 2008 Accepted 1 February 2008
a b s t r a c t This article focuses on foreign partnering in the family-owned business sector of a developing economy in Latin America. The article presents a report on four selected Brazilian companies. Following an analysis from a grounded theory perspective, the findings are discussed, and directions for future research are provided. © 2008 Elsevier Inc. All rights reserved.
Keywords: Family-owned business Foreign-partnership Brazilian northeast Export
1. Introduction The best seller, The World is Flat: A Brief History of the Twenty-First Century by New York Times columnist Thomas L. Friedman is one recognition of the prolific global changes in the new millennium (Friedman, 2005). According to Friedman, the explosive growth of telecommunications has shattered all barriers to global competition and “accidentally made Beijing, Bangalore and Bethesda next-door neighbors” in a new leveled economic world. Richard Florida of George Mason University takes issue with Friedman's “flat world” analogy and contends that while globalization has indeed altered the economic playing field, it has not leveled it (Florida, 2005). Instead, he envisions a spiky world; the spikes, representing the unevenness in economic development, are unequal in magnitude. The peaks, hills, and valleys in Florida's “spiky” description seem to more aptly characterize the 21st Century economic world as some regions or countries are developing faster or becoming far more globally active than others. In other words, the role and effects of globalization are not uniform across the world or even within a nation. Brazil, a developing economy, appears to be a case in point. The Northeastern Region (NR) is among the less globally active regions within Brazil. NR provides a low percentage of the Brazilian exports. The relatively small size of the NR market and its greater geographic distance from the Brazilian economic center constrain its development. This region nevertheless evinces great potential to be on the upswing on
⁎ Corresponding author. Tel.: +1 334 844 2450 or 2465; fax: +1 334 844 4032. E-mail addresses: [email protected] (S.A. de Farias), [email protected] (R. Nataraajan), [email protected] (E.P. Kovacs). 1 Tel.: +55 81 2126 8880; fax: +55 81 2126 8870. 0148-2963/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2008.02.003
the global economic dimension mainly because foreign partnerships appear to be on the rise, particularly in the family-owned business sector. This research stems from this educated premise and focuses on NR's potential in this regard. 2. The Brazilian and the NR Global Outlook “Internationalization” can bring about advantages in all facets of a business (e.g., Wild et al., 2006; Yip, 1995; Hitt et al., 2002; Kotabe and Helsen, 2000). Further, the internationalization process is a major dimension in the ongoing strategy process of most business firms (Melin, 1992). Actually, it is now becoming clearer that, with the world becoming smaller and smaller, a lack of a global outlook on the part of an organization may result in their losing even their national markets to competitors from around the world. Despite the recognition of the benefits that the internationalization process can bring about, the Brazilian participation in the global arena hitherto is hesitant if not timid. In 2005, Brazil was ranked 23rd among the exporters of the world even though it had the 10th largest GDP (Gross Domestic Product). Comprising ten states, NR, represents less than 14% of the Brazilian GDP. The Brazilian exportation list consists of 7000 different items commercialized by 20,000 companies of which only 1738 companies are accounted for by NR. The most exported Brazilian products are vehicles, soy, iron & steel, aircrafts, and ores. However, a top-heavy pattern exists as 75% of the Brazilian sales to foreign countries are done by the 250 largest exportation companies; NR reflects this pattern as its large companies account for more than 70 percent of the total NR exportation. This situation not only indicates that a tiny fraction of the companies hold the lion's share of export business but also underscores the need for
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a greater participation in this regard by micro, small, and medium sized companies. As per the Brazilian Development Ministry's latest statistics, the micro companies comprise 19% of the Brazilian exportation companies but account for only 0.20 percent of the total export dollar amount. The small companies comprise 27% of the exportation companies but account for only 1.6% of the total export dollar amount. Finally, while the medium companies comprise 28% of the Brazilian exportation companies, they account for a mere 7 percent of the total export dollar amount. Needless to say, nearly 92 percent of the total export dollars concentrate in the biggest companies that comprise only a fourth of the total number of exportation companies! The state of Pernambuco, located in NR, represents only 3 percent of its GDP and represents less than 1 percent of the country's total export dollar amount. In the national exporters ranking in 2004, the latest data available in Brazil, Pernambuco is in 17th place (out of 27) and, in contradiction to the current Brazilian status, it still maintains a deficit in its commercial balance! Only 219 companies export and the exports are quite concentrated in some products, most of which are without aggregated value, such as sugar (30%), iron and steel (22%), fruits (10%), and crustaceans (7%). This is ironic considering that NR is geographically closer to the viable European and American markets and the smaller distances can bring about a reduction in some cost components that can make a difference in the final price calculus of products abroad. 3. Objectives Scholars research the aspect of networking in the internationalization process but such exploration occurs mostly in contexts pertaining to the “peaks of the spikes” (Florida, 2005). Far less attention focuses on the “short spike” clusters of the world. The lack of experience in exportation is the reality with the majority of small and medium companies not only in NR but also in Brazil as a whole. This ineluctable fact couples with the glaring lacunae in the literature on the internationalization process of companies in developing economies provided the motivation to conduct the research reported in this article. In essence, this research aims to understand the different realities experienced by exporters with no prior experience in international business, and their international partners. This article fulfills three objectives: (1) to assess the role and influence of foreign partnerships in the success/failure of mediumsized companies in the family-owned business sector of NR, (2) to understand how these firms perceive and comprehend success and failure, and (3) to understand and assess the role of foreign partnerships in shaping both the national and international strategies of the domestic (Brazilian) firm. 4. Method Fulfilling of the objectives occurs through a qualitative study in the exploratory mode. Specifically, the method involved “selected case analysis” carried out from a grounded theory perspective. Essentially, a grounded theory perspective aims at building substantive theory after carefully considering the practice. In this sense, it is grounded to the real world. The final result is a theory that results from the data and therefore has relatively more specificity and practical utility. In particular, this approach is appropriate to the study of any behavior that has an element of interaction. For a comparative analysis of grounded theory, ethnography, and phenomenology, the reader is referred to the work of Goulding (2005). Given that the overall objective was to understand the internationalization process carried out by NR firms, this qualitative method in the exploratory mode, at least as an important first step, was appropriate. Four family-owned NR companies that ranged from small to medium size were chosen for in-depth study and the data were collected through semi-structured personal interviews with key
informants (e.g., the main managers of the firm). The case analysis pertaining to each of these four companies with disguised names is presented one by one in the next section. 5. The four cases 5.1. Company A: Alco This company belongs to the alcoholic beverage industry and illustrates that success, perhaps, lies in the eyes of the beholder. Alco markets “cachaça” (a sugarcane-based rum used in the preparation of the well-known Brazilian alcoholic beverage called “caipirinha”) as well as fruit cocktails, cognac, rum, and vodka. In 2003, under the auspices of an export promotion project sponsored by the local government, the company entered the export market through a partnership with a well established firm in Europe. Prior to this venture, Alco had no experience in exportation and had confined its operation only to the domestic market, the rural areas in particular. Actually, even though, it had 16 years of experience in the local market, it had not acquired any knowledge of the international market for its products until it began to participate in the above government project for exportation promotion. The company was included in the project in November 2002, and it was the first “project” company to export, and the only one to do so until the end of the promotion period. In its internationalization process, the company chose to reduce its product- portfolio. It first attempted to introduce passion fruit and lemon cocktails, and pure cachaça. During the project period, the company participated in international fairs in Europe and Asia, as well as in international missions and national fairs. At one of these international fairs in Europe, the manager of the government project met a prominent European importer who had an interest in Alco's products, but nevertheless opined that some aspects of the products and packaging needed to be altered. The following comments from subjects capture the above: When I met the client, he believed in the success of the products (cachaça and cocktails). He thought that due to the prevailing Brazilian image in France the products would be well received. …… However he thought that the label was poor, the bottle was too big for the European standards, and the flavor should be changed…… as well as a reduction in the sugar and alcohol contents. However, he was willing to participate in the process and help in changing the product. (The quoted comments in this article are verbatim translations from Portuguese to English. This was done to retain the local cultural flavor even at the risk of yielding awkward syntax in English.) That subjects recognized the importance of establishing “contacts” (networking) is reflected in the following comments: What helped the exportations the most was the participation in fairs and missions…the contacts that I made there….We didn't make business on the moment, but after we hung in tough. Such contacts initiated networking which quickly began to influence the internationalization process of the company. Since these first meetings, a process involving e-mail exchange, telephone calls, and international trips ensued and lasted for six months. After the needed changes in the products were incorporated, the first exportations to Europe occurred. The Brazilian exporter was very interested in being paid in euros which the importer did with alacrity thereby supporting Alco's cash flow situation. The European partner aided Alco in re-designing all aspects of marketing including packaging, labeling, and product content
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specifications, and the latter was suddenly doing well in the export business! However, this state did not last long as the company managed to ruin its relationship with the European partner owing to non-conformity with the contractual terms. In a nutshell, the company actually began to cut corners to reduce costs without paying any heed to the contract! The interviews revealed that Alco's actions were most likely the result of inefficiency and ineffectiveness and not a wanton desire to cause harm, financial or otherwise, to the European partner. However, it became equally clear that the partner (who was also interviewed) could not comprehend such violations to the contract and viewed them negatively. In the final analysis, while the European Partner deemed the venture a failure, Alco opined otherwise. For this company, strangely enough, the mere fact that it could display the label “export product” on its offerings depicted “success”. 5.2. Company B: Tex This company used to export handmade textiles to Belgium. They did not produce the items themselves. Instead, they relied on suppliers of handmade textiles in the rural regions of the state. The company did not have any prior experience in exporting and by its own admission, held a simplistic view of the exportation business. Apparently, in their naïveté', they trusted the first international businessman (of Belgian nationality) who came along to offer something in this regard! And Tex came into existence as an exporting company. The first exports happened without a hitch and the export volume started to increase fairly rapidly. This partnership, at the beginning, seemed to be a “win–win” one, but soon the importer started pressuring Tex to reduce their prices citing market price-related reasons for his request. The importer refrained from furnishing market-related details to Tex and was pretty much controlling the show. Tex later found out that this pressure had nothing to do with market prices but had everything to do with importer greed! In other words, while Tex reduced its prices, the importer continued to rake in his margins. Needless to say, this revelation of the selfishness of the importer caused them to harbor much resentment. In any case, realization dawned on Tex that the initial “win–win” partnership had relegated to a “win–loss” one, with Tex taking all the loss. The following comments capture the above. At the beginning we were quite naive. We believed that the importer wanted to help us. Sooner, something different came out. He was pressuring us to decrease the prices but these were stable in Belgium. He wanted to have higher profit margins and we were practically working for him, not with him. In the wake of this dismal experience, and after an unsuccessful quest for alternative partners, Tex chose to open its own sales subsidiary abroad, but soon decided to close it down because it simply lacked the experience to deal with international competition especially from China, as captured in the following comments:
We realized that the business would not go on with that foreign partner…… This way, we decided to open a sales subsidiary to directly deal with our clients”…… Unfortunately, our lack of adequate European market knowledge, and the competition, especially from Chinese, made us give it up and close our European base. Obviously Tex had neither the international experience nor even sufficient information to open and run its own subsidiary successfully. In the final analysis, Tex considered this foreign partnership a complete failure not because of inept management but simply owing to overwhelming competitive forces.
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5.3. Company C: Flower World Company C is in the tropical flowers business. Initially, it was operating only in the domestic arena. Soon, sensing the export potential of the product, it entered the European market through direct selling to flower importers in that market. In the beginning, the company was buying products from local (in-state) producers and exporting the same to Europe. In other words, Flower World was relying totally on the effectiveness and efficiency of local producers for the supply of flowers. However, such reliance turned out to be highly risky because the local producers were experiencing fiscal problems and were unwilling to adopt better production methods. Even though other out-of-state suppliers were available, given the perishable nature of the product and the logistical difficulties, Flower World took the bold step to produce its own flowers through a local cooperative, which led to satisfactory stabilization in its export business. Overall, Flower World characterizes itself as successful and attributes its success to its own bold initiatives in reducing uncertainties in supply. Currently, Flower World is a major producer in the state and the international venture helps the cash flow of the company. The following comments capture the audacious savvy in the entrepreneurial behavior of these businessmen when searching for international opportunities: I would get to Italy and open the local yellow pages to search for flower distributors. I do not speak English but I would do fine. I would schedule the meetings, and ended up getting our local distributors this way. Today, the company has a partnership that can only be considered a success. The foreign partner is involved in the whole process, from the packaging to the exportation logistics, and also helps with flower bouquet contests and flower fairs. This partnership has brought a great deal of expertise to this NR firm that is resulting in significant improvement in their business process including global professionalism. Flower World is currently negotiating with a big international retailer, which, if it fructifies, will lead to doubling their production. 5.4. Company D: Conglam Company D has quite a diversified product portfolio including flowers and fruits production, pet food and medicines distribution, and seeds technology. In the beginning of 2006, when it realized the export boom in the “cachaça” business, Conglam started to develop its own brand based on a secret recipe that had been in the owner's family for many years. As a matter of fact, the “cachaça” export volume doubled from 2001 to 2005 in Brazil, and companies are now seeking this international opportunity, capitalizing on the perceived trendiness of Brazilian beverages in Europe. Before production started, Conglam established several relationships resulting in internal and external partnerships. The entrepreneurs, due to a bad experience in the past, decided to invest effort in partnerships beforehand, since they consider that it is a real partnership that leads to success. The national partnerships involved local consultants, specialists and suppliers, while the international ones included European importers of “cachaça” who had a reputation for active participation in the various facets of the operation (brand name determination, pricing, packaging, and aspects of the product itself) of their international suppliers. In short, they wanted to implement on the platform of a “building together” strategy. Some of the above is captured in the following comments: We decided to begin the process with the best in each area…… We hired the best consultants in the international business, cachaça production, etc…
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It was a risky business for everyone, which we believe will work out fine. If we succeed, all will win and it is clear that everyone is committed for that to happen… We developed the product for the international market… We used a local advertising agency, and it did not work… The international market is different, clients are different….The best solution was to involve possible international clients in the development of packaging, product characteristics, etc, through partnerships. It was the best thing we have done. The first exports occurred in December 2006 without mishap before and after. They also began to participate in international (e.g., IFE, Alimentaria) and national fairs as well as in events sponsored by SEBRAE (the Brazilian agency for small and medium companies) mainly to bring greater awareness to their brand both in EU and Brazil. So far, other than for some periodic price adjustment problems, it has been a fairly smooth sailing for them in the international economic ocean. Therefore, Conglam is a “success”. 6. Discussion and conclusions In the four cases presented in this article, t network establishment is an important trigger factor for the first exportation. Networks can also facilitate smooth operation in export markets (Ghauri et al., 2003). These cases also show that partner selection is critical to success and in line with alliance theory, each of these companies from the emergent Brazilian market (in contrast to the ones in a developed market) was searching for a partner who could offer it both financial support and target market knowledge (Hitt et al., 2000). The four companies are clearly in the “Floridian short spike” cluster (Florida, 2005) and relatively far less experienced and knowledgeable regarding world markets, product preferences, legislation, and consumer issues. Nevertheless, these companies found in partnerships a way to enter and compete in the global arena, although, with the possible exception of Conglam, the decision-making during the whole process of internationalization was very passive; the initial stimulation came from external entities, such as the government or international buyers. Unfortunately, despite the initial promise, the continuation of the internationalization process was not observed in all the cases. Alco and Tex no longer export, and can therefore only be deemed unsuccessful companies at least insofar as their international debut are concerned. This may be traced to a disharmony between the export company's objectives and its partner's objectives; actually, one tried to take advantage of the other, causing a fatal rupture in the budding relationship. The lesson here is that, for a “win–win” situation to result, the internationalization process must continue on the foundation of real and earnest commitment from both dyadic elements. Balance theory (Heider, 1946, 1958) helps depict the Alco situation as shown in Fig. 1a, b, and c. The first figure depicts the situation at the start where seemingly the net product of the triad (3 sides) is “positive” ([+] × [+] × [+] = +) resulting in a balanced configuration. Fig. 1b shows the decline in the situation with the path from Alco (the exporter) to “Real and Earnest Commitment” degenerating to a negative, thereby rendering the net product “negative”, and thus resulting in an unbalanced configuration. Fig. 1c shows how balance is regained. The Exporter–Importer relationship becomes negative making the net product positive once again; apparently, it is easier to blame the other dyadic entity than admit to not being seriously committed to a real and earnest partnership, and thus attain cognitive consistency. In the case of Tex also, the above disharmony between the dyadic objectives was revealed. While the Brazilian exporter had the good will and commitment to the partnership, the importer had greater
Fig. 1. Alco: A Heider balance theory perspective.
interest in taking advantage of the Brazilian company, which eventually ended the relationship. But the disappointment with its international partner actually spurred the company to jump to a more advanced level of internationalization, that is, having an international sales subsidiary. This is a surprisingly new find in this research in that disenchantment in an existing relationship can sometimes trigger the desire to take the high road and move on to try one's luck at an advanced level of the game. Fig. 2a, b, and c depict the situation with Tex from a Heider balancetheory vantage point and are self-explanatory. Note that, in contrast to the Alco situation, it is the foreign partner who is the villain! Flower World and Conglam are successful cases, where a “win–win” partnership sustained the internationalization process and enabled the derivation of mutual benefits for the network. Evolution toward solidarity and cohesion as well as serious commitment from both parties maintained the internationalization process. The foreign partnership in either case was therefore legitimately considered a “success”. The Heider balance-theory perspective remains constant in both cases. These four cases also bring out the relativity in the perception of success or failure. For instance, there may be overall success but such success may be viewed as entirely due to the foreign company or seen as solely for the foreign company. Even though it does not export anymore, Alco considers itself as a successful company solely for having put its products on the European market despite the fact that it perceived the
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Fig. 3 depicts the essence of the foregoing discussion. If it is only the foreign partner who is completely serious about the partnership, then that may likely result in the perception of “success” by only the exporter; the foreign partner will most likely sense only a “failure”. On the other hand, if it is only the exporter who is serious about the partnership, then the opposite may be the likely occurrence. It is only when both parties are serious about their partnership will there be a mutual perception of success. In other words, anything short of a twoway street in an international partnership can only spell doom. 7. Directions for future research
Fig. 2. Tex: A Heider balance theory perspective.
importer as participative and encouraging in the beginning but quite problematic after that. The foreign partner, on the other hand, considers that the venture was a complete failure, and does not expect to do business with the exporter “partner”.
The relevant literature reveals that even though global business is important to all countries, the theories that try to explain the internationalization process have been mostly developed in countries that are in the “peaks of the spikes”. The life cycle model (Vernon,1966, 1979), the eclectic paradigm (Dunning, 1980, 1988), the internationalization theory (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne,1977, 1990), and more recently, the Resource Based Model (Fahy, 1998a,b; Dhanaraj and Beamish, 2003; Sharma and Erramilli, 2004) have all been conceived and elaborated in developed countries. As another example, the adaptive choice model (Lam and White, 1999) declares that managers, when internationalizing, have to solve four specific dilemmas: relative to adaptation of products (standardize or not) and timing of entry (to be a first mover or late mover), organizational configuration, compensation, and the interactions among these. However, just the first dilemma seems to be relevant to the decisions taken in companies that only export. After all, exportation is the first stage of a company's internationalization process. What really happens to the companies that are mostly at the “bottom of the spikes” and that find themselves in more preliminary stages of internationalization? How does the decision-making process to internationalize happen in developing countries such as Brazil, and particularly in small and medium size companies? Such questions have received relatively scant attention in the literature. Fig. 3 depicts the process of perception of success or failure in an international partnership and some key elements necessary for a meaningful evaluation of a partnership in that scenario. This research indicates that what basically counts is the subjectivity in how the outcome is perceived by each side. There must be some kind of commitment, solidarity, and cohesion between the parts for mutual perceived success. This takes time, and in a culturally diverse world, there is more often than not, a lack of a common view on these elements among nations. In any case, for the sake of external validity, it becomes imperative to test the relationships based on the elements proposed in Fig. 3 in a variety of other situations. Only such research
Fig. 3. The relativity in the perception of success or failure.
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will help in better understanding how success or failure is perceived and interpreted by the entities in the global market. The spiky nature of the economic world underscores the need to develop models that would be readily applicable to countries or regions that may not be considered “developed” or “advanced”. This is why, at least as a first step, it might be very useful to study selected cases in these countries or regions, and the findings then can lead to models that will be applicable to developing economies or LDCs aspiring to enter the global competitive arena. The traditional theories of internationalization have also been criticized for not emphasizing the role of networks in the internationalization process (Rutashobya and Jaensson, 2004). By and large, the existing literature only examines networks from the perspective of one of the parties involved (Ford, 2002). As was seen in the cases in this article, networking can contribute to success. Further, it may be noted that the grounded theory approach has the potential to reveal the network details on both sides. In any case, future research would do well to address “networks” in a comprehensive fashion. Finally, while the current global competitive environment demands specific pro-active applications of exportation strategies to achieve success in foreign markets (Aulakh et al., 2000), the decisions to enter the international markets through exportation could be reactive or proactive (Piercy, 1981) according to the responses to the internal and external pressures (Kuada and Sorensen, 2000). In the four case studies presented in this article, although the reactive element loomed large, there were proactive instances. Studying this aspect in more depth in the context of developing economies would be worthwhile. References Aulakh Preet S, Kotabe Masaaki, Teegen Hildy. Export strategies and performance of firms from resource-based emerging economies: evidence from Brazil, Chile and Mexico. Acad Manage J 2000;43(3):342–61. Dhanaraj Charles, Beamish Paul W. An approach to the study of export performance. J Small Bus Manage 2003;41(3):242–61. Dunning JH. Towards an eclectic theory of international production: some empirical tests. J Int Bus Stud 1980;11:19–31. Dunning JH. The ecletic paradigm of international production: a restatment and some possible extensions. J Int Bus Stud 1988;19(1):1–31. Fahy John. Resources and global competitive advantage: a study of the automotive components industry in Ireland. Ir Mark Rev 1998a;10(2):3–15.
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